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📮The Sunday Newsletter archive

Toasts ‘N More

The market looks shaky right now; Dow is down 3.18% from its peak, closing lower for a third straight week. Welcome to September, historically the toughest month for stocks.

Yet despite volatility, there’s a huge appetite for high-quality IPOs. Coffee chain Dutch Bros ($BROS) and running shoe maker On ($ONON), two of the IPOs we discussed last Sunday, surged in their debuts. And more promising names will hit the markets in the week ahead, let’s see.

Toast is going public

Toast ($TOST) is an end-to-end cloud-based platform for the restaurant community. It provides a suite of solutions like POS, digital ordering and delivery, and management of restaurant operations among others. The company was founded in 2012 but has already become one of the leading platforms for restaurants, serving more than 48,000 locations as of June 30.

Toast reduced its headcount by 50%👀 in 2020 due to the pandemic, but eventually managed to grow its revenue by 24% as it shifted its focus to online sales. The company is not profitable yet but its operating margin is moving in the right direction. It improved to -27% last year from -32% in 2019. In the first half of 2021, its revenue doubled y/y to $704 million as restaurants opened their doors again and operating margin further improved to -8%.

Commentary: While Toast faces competition from strong names like Square ($SQ) or Lightspeed POS ($LSPD), it can continue to grow for two reasons. First because of the huge addressable market. As of June 30, the company served just 6% of the 860,000 restaurants in the US, making it clear that the growth potential ahead is very strong.

Second, Toast is one of the most comprehensive restaurant platforms on the market. It’s essentially an operating system for restaurants as it offers a wide range of solutions, from managing in-store and online payments to managing employees and offering financing options.

The company has priced its IPO at a midpoint price of $31.50 apiece which translates into a market value of $15.7 billion. At this price, its P/S ratio will be 13.3, which is a very reasonable multiple given Toast’s rapid growth and strong future potential. Shares start trading on Wednesday.


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A fresh approach to CRM
Freshworks balloon

Freshworks ($FRSH) is next week’s largest IPO — it plans to raise more than 💰 $1 billion. The company is a huge success story given its humble beginnings. It was founded in 2010 in Chennai, India and its first product was a customer service platform. It found success by focusing on underserved customers so it expanded its offerings to include IT service management and a modern CRM solution for companies of all sizes. It now competes with Salesforce ($CRM), the leader in CRM, as well as with customer services SaaS firms like ZenDesk ($ZEN).

Despite the competition, Freshworks is growing very fast thanks to its affordable prices and its high-quality platform. In the first half of the year, revenue grew 53% y/y to $169 million. The company is also nearing operating breakeven as operating margin improved significantly from -22% last year to -5% in the first half of 2021. And at the same time, it reported operating cash flows of $8.6 million.

Commentary: Freshworks wins because it offers tools for sales, marketing, customer support, and IT service management on a single platform. In other words, customers don’t need to use multiple tools from different companies. It’s a strong competitive advantage that will help it grow and gain market share.

Freshworks has priced its IPO at a midpoint price of $30 per share. At this price, the company will be valued at $8.3 billion and the P/S ratio will be 27. It’s quite an expensive multiple 🏷️🏷️ but Freshworks deserves a premium valuation due to its strong top and bottom line performance. FRSH starts trading on Wednesday.


Personalized wellness
Thorne boxes

Thorne HealthTech ($THRN) is a modern wellness company. It sells 💊nutritional supplements direct-to-consumer but what makes it different is its focus on personalization. It has developed home tests that customers use to find potential health risks and specific areas of improvement. Then based on these results, the company creates personalized recommendations such as making a lifestyle change or using nutritional supplements.

Thorne makes money from both tests and supplements, but its main goal is to increase its subscribers who opt into recurring automatic refills. As of June 30, it had 194.7K subscribers and subscriptions accounted for 35% of total revenue. The company has been increasing subscriptions as a percentage of revenue every year.

Thorne is growing fast and is already profitable as it acquires customers organically through its site; in the first half of the year, revenue increased 34% to $44 million and its operating margin came in at 15%. Over the same period, it reported operating cash flows of $8.7 million.

Commentary: The nutritional supplements industry is extremely large and growing fast. It was an estimated $140.3 billion market in 2020 and is forecast to reach $271 billion by 2028. While it’s a super competitive industry with thousands of products on the market, Thorne has managed to rise above the clutter thanks to its personalized approach. Also, its focus on increasing its active subscribers will make its financials more predictable, and investors love predictability.

At the proposed midpoint price of $14 apiece, Thorne will be valued at $763 million and its P/S ratio will be 5. It’s a very reasonable multiple given the company’s focus on recurring sales as well as its fast and efficient growth 📈. THRN starts trading on Thursday.


Ranking:

🥇TOST
🥈FRSH
🥉THRN

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